The Reports That Drew Federal Eyes To Spitzer

By DAVID JOHNSTON and STEPHEN LABATON

Published: March 12, 2008

Last summer, employees at a large New York bank detected something suspicious: Gov. Eliot Spitzer was moving around thousands of dollars in what they thought was an effort to conceal the fact that the money was his own, federal officials said on Tuesday.

They said the apparent sleight of hand kept the transactions small and removed his name from deposits. The governor's actions prompted the bank to file alerts known as Suspicious Activity Reports with the Treasury Department, which were reviewed by I.R.S. agents on Long Island, the federal officials said.

A few months later, another New York bank sent its own reports of suspicious activity to the Treasury. They showed that Mr. Spitzer and others, including people overseas, collectively deposited hundreds of thousands of dollars into an account of a company called QAT International Inc., whose business involved foreign accounts and shell companies and appeared to be vaguely related to pornography Web sites.

It was the bank reports, required under federal law, that apparently tripped up Mr. Spitzer, setting in motion the federal investigation that identified him as a client of a high-end prostitution ring.

The federal officials said the rules that ensnared Mr. Spitzer apply to every bank customer, but they acknowledged that questionable activity involving a public official, particularly a prominent figure like the governor of New York, was likely to receive quicker and more thorough review.

Financial institutions have long been required to file reports on questionable transactions, but since the Sept. 11 terrorist attacks banks have been under heavier pressure from federal regulators to report any kind of questionable activity -- even if, for example, a customer appears with cash that gives off a chemical-like odor.

As a result, the number of such reports has quadrupled, to more than one million in 2006 from not quite 205,000 in 2001, according to the federal government. When he was New York State's attorney general, Mr. Spitzer himself used the reports to make his cases.

The federal officials sought to emphasize that Mr. Spitzer, a Democrat, had not been singled out by the Republican administration, although allegations of political interference dogged the Justice Department during the tenure of the former attorney general, Alberto R. Gonzales, who left office last year after lawmakers in both parties called for his removal. The Spitzer investigation began in July and Mr. Gonzales resigned in August last year; it is not clear whether he knew about it.

Michael B. Mukasey, Mr. Gonzales's successor, was aware of the prostitution case involving Mr. Spitzer but did not specifically authorize the filing of charges, the federal officials said. Mr. Mukasey has pledged to manage the department's criminal investigations in a manner free from partisan political interference.

The federal officials, who had been briefed on the case, spoke on condition of anonymity because they were not authorized to discuss the continuing criminal investigation and because it can be a crime to disclose the contents of a suspicious activity report.

Last July, suspecting that Mr. Spitzer might be involved in some kind of public corruption, the Treasury Department referred the banks' reports to a section of the Manhattan federal prosecutor's office that usually handles cases involving official wrongdoing. The case was not turned over to the criminal unit, which would usually investigate major prostitution rings.

The officials said that no one knew at first the nature of QAT's business or why Mr. Spitzer seemed to be trying to hide what appeared to be payments to the mysterious company that seemed to have no real business. Investigators at the bank were said to have thought it could have involved organized crime.

Officials acknowledged that Mr. Spitzer was a subject almost from the start, because of the banks' Treasury Department reports. The officials said the investigators were surprised when they learned that Mr. Spitzer was involved in activities very different from the kickbacks, bribery and theft of honest services cases they usually encountered.

Relying heavily on financial records and court approved wiretaps, investigators found that Mr. Spitzer was a customer of an expensive prostitution operation, which used a Web site to attract customers who paid thousands of dollars an hour for the services of its young women.

The officials said Mr. Spitzer was implicated in potential wrongdoing in two ways, first for the apparent efforts to hide the financial arrangements and second for the arrangements for a prostitute to travel to Washington -- a possible violation of the Mann Act, a federal law that makes it a crime to cross a state line for purposes of prostitution.

The officials said federal authorities rarely prosecuted either offense, unless it was connected to a more serious illegal activity like human trafficking or drug smuggling. They also said investigators did not use some tools at their disposal. For example, while Mr. Spitzer's encounter with the prostitute in Washington was carried out under heavy surveillance, there were no video or audio recording devices in the hotel room.